Method for creating commodity assets from unrefined commodity reserves utilizing blockchain and distributed ledger technology

ABSTRACT

A method for creating an asset-backed distributed ledger token representing a smart contract, the token being backed by a pledge of an illiquid form of a precursor or means of production of a commodity asset, comprising receiving a pledge of unrefined or pre-commodity asset, digitizing the unrefined commodity asset into fractional representations of the commodity asset using smart contracts on a distributed ledger network, and allowing account holders access to the perform transactions on the distributed ledger network to trade the fractional representations under the terms of the smart contract.

CROSS REFERENCE TO RELATED APPLICATION

The present application claims benefit of priority from U.S. ProvisionalPatent Application Ser. No. 62/468,764, filed Mar. 8, 2017, the entiretyof which is incorporated herein by reference.

FIELD OF THE INVENTION

The present invention relates to the field of securitized transactionsand smart contracts, and encompasses systems and methods for conductingtransactions.

BACKGROUND OF THE INVENTION

Each reference cited herein is expressly incorporated herein byreference in its entirety, for all purposes.

In the current marketplace, a commodity asset owner can go to a lenderand securitize the commodity assets thereby gaining liquidity. Theproblem with this current model is that it requires a liquid commodity,and when securitized, the commodity may be restricted from beneficialuse. Further, the value of the commodity may be deeply discounted, andongoing interest charges are accrued.

Frolov et al., U.S. Pat. No. 9,747,586, discloses a system and methodfor issuance of electronic currency substantiated by a reserve ofassets. The reserve is a commodity or asset that is actively traded.

Miner, US 20150332256, discloses a system and method for convertingcryptocurrency to virtual assets whose value is substantiated by reserveof assets. The reserve is, for example, book entries for fiatcurrencies, which are actively traded.

Doney, US 20170213289, expressly incorporated herein by reference in itsentirety, describes creation of collateralized portfolios, as acollection of income-producing assets, generated through transactionsthat exchange estimated asset value for liquid instruments in theportfolio. Transaction elasticity is provided by liquid instruments(reserve funds and portfolio-owned shares) held in reserve in theportfolio's reservoir which provides a market smoothing function toadapt to changes in asset demand and risk. Each portfolio's reservoir iscollectively owned by the shareholders; continuously replenishing itselfwith income generated by assets in the portfolio. Shares can berepresented by digital tokens, traded as digital currency such ascryptocurrency, and monetized with the convenience of cash through anetwork of exchanges and payment gateways.

Vieira et al., US20180047111, expressly incorporated herein by referencein its entirety, describes enhanced organizational transparency using alinked activity chain in a ledger, employing a block chain.

So-called “Smart Contracts” are legal obligations tied to a computerprotocol intended to digitally facilitate, verify, or enforce thenegotiation or performance of the contracts. Smart contracts allow theperformance of credible transactions without third parties. Thesetransactions are trackable and may be irreversible. See,en.wikipedia.org/wiki/Smart_contract. The phrase “smart contracts” wascoined by computer scientist Nick Szabo in 1996. See, “Nick Szabo—SmartContracts: Building Blocks for Digital Markets”. www.fon.hum.uva.nl,Extropy #16; Szabo, Nick (1997 Sep. 1). “Formalizing and SecuringRelationships on Public Networks”. First Monday. 2 (9); Tapscott, Don;Tapscott, Alex (May 2016). The Blockchain Revolution: How the TechnologyBehind Bitcoin is Changing Money, Business, and the World. pp. 72, 83,101, 127. ISBN 978-0670069972. A smart contract is a set of promises,specified in digital form, including protocols within which the partiesperform on these promises. Recent implementations of smart contracts arebased on blockchains, though this is not an intrinsic requirement.Building on this base, some recent interpretations of “smart contract”are mostly used more specifically in the sense of general purposecomputation that takes place on a blockchain or distributed ledger. Inthis interpretation, used for example by the Ethereum Foundation or IBM,a smart contract is not necessarily related to the classical concept ofa contract, but can be any kind of computer program. See, Buterin,Vitalik. “Ethereum Whitepaper”, Github; Cachin, Christian. “Architectureof the Hyperledger Blockchain Fabric”, ibm.com.

Byzantine fault tolerant algorithms allowed digital security throughdecentralization to form smart contracts. Additionally, the programminglanguages with various degrees of Turing-completeness as a built-infeature of some blockchains make the creation of custom sophisticatedlogic possible. See, “Smart contracts: Turing completeness & reality”;“Dumb Contracts and Smart Scripts—We Use Cash”. weuse.cash.

Notable examples of implementation of smart contracts are Decentralizedcryptocurrency protocols are smart contracts with decentralizedsecurity, encryption, and limited trusted parties that fit Szabo'sdefinition of a digital agreement with observability, verifiability,privity, and enforceability. See, “How Do Ethereum Smart ContractsWork?—CoinDesk”. CoinDesk. Retrieved 2017 Oct. 27; “Bitcoin as a SmartContract Platform”. Richard Gendal Brown. 2015 Mar. 30; “Blockchain:Forget Bitcoin, here comes the real thing”. Idealog. 2016 Mar. 29; “Whatare Smart Contracts” (PDF). chainfrog. Aug. 3, 2017. Bitcoin alsoprovides a Turing-incomplete Script language that allows the creation ofcustom smart contracts on top of Bitcoin like multisignature accounts,payment channels, escrows, time locks, atomic cross-chain trading,oracles, or multi-party lottery with no operator. Rosa, Davide De. “TheBitcoin Script language (pt. 1)”. davidederosa.com; bitcoinbook:Mastering Bitcoin 2nd Edition—Programming the Open Blockchain—Chapter 7,Mastering Bitcoin, 2017 May 30; “Smart contracts and bitcoin”,medium.com/@maraoz/smart-contracts-and-bitcoin-a5d61011d9b1;“Contract—Bitcoin Wiki”. en.bitcoin.it; “What is a Bitcoin MerklizedAbstract Syntax Tree (MAST)?”. Bitcoin Tech Talk. 2017 Oct. 12; “SmartContracts on Bitcoin Blockchain” (PDF). Sep. 4, 2015; Andrychowicz,Marcin; Dziembowski, Stefan; Malinowski, Daniel; Mazurek, Lukasz (2013).“Secure Multiparty Computations on Bitcoin”; Atzei, Nicola; Bartoletti,Massimo; Cimoli, Tiziana; Lande, Stefano; Zunino, Roberto (2018), “SoK:unraveling Bitcoin smart contracts” (PDF), 7th International Conferenceon Principles of Security and Trust (POST), European Joint Conferenceson Theory and Practice of Software. Ethereum implements a nearlyTuring-complete language on its blockchain, a prominent smart contractframework. Atzei, Nicola; Bartoletti, Massimo; Cimoli, Tiziana (2017),“A survey of attacks on Ethereum smart contracts” (PDF), 6thInternational Conference on Principles of Security and Trust (POST),European Joint Conferences on Theory and Practice of Software; “VitalikButerin on Tweeter (verified)”. 18 Apr. 2017. RootStock (RSK) is a smartcontract platform that is connected to the Bitcoin blockchain throughsidechain technology. RSK is compatible with smart contracts created forEthereum.

“RSK—Rootstock Open-Source Smart Contract Bitcoin Technology?”, “DigrateExpress rating report on Project Rootstock”; Thomas Bocek (15 Sep.2017). Digital Marketplaces Unleashed. Springer-Verlag GmbH. p. 169-184.ISBN 978-3-662-49274-1; “A Solution for the Problems of Translation andTransparency in Smart Contracts”; “Trust in Smart Contracts is aProcess, As Well”; “Scripting smart contracts for distributed ledgertechnology”. See also, “Namecoin”. Cointelegraph. 23 May 2015. AutomatedTransactions; “Ripple discontinues smart contract platform Codius”.Bitcoin Magazine. Jun. 24, 2015; “Automated Transactions Specification”;“Qora and Burst Now Able to Make Cross-Chain Transactions”. May 22,2015.

Smart contract infrastructure can be implemented by replicated assetregistries and contract execution using cryptographic hash chains andByzantine fault tolerant replication. See, Nick Szabo (2005). “SecureProperty Titles with Owner Authority”; Jörg F. Wittenberger (2002).“Askemos a distributed settlement”; “Proceedings of InternationalConference on Advances in Infrastructure for e-Business, e-Education,e-Science, and e-Medicine on the Internet”; Martin Möbius (2009).“Erstellung eines Archivierungskonzepts für die Speicherungrückverfolgbarer Datenbestände im Askemos-System”; Tom-Steve Watzke(2010). “Entwicklung einer Datenbankschnittstelle als Grundlage fürShop-Systeme unter dem Betriebssystem Askemos”.

R A Markus Heinker (2007). “Beweiswurdigung elektronischer Dokumente imZivilprozess unter vergleichender Betrachtung von qualifiziertenelektronischen Signaturen nach dem Signaturgesetz and demAskemos-Verfahren”; Hal Hodson (20 Nov. 2013). “Bitcoin moves beyondmere money”. New Scientist.

Smart contracts have advantages over equivalent conventional financialinstruments, including minimizing counterparty risk, reducing settlementtimes, and increased transparency. UBS proposed “smart bonds” that usethe bitcoin blockchain in which payment streams could hypothetically befully automated, creating a self-paying instrument. See, “BlockchainTechnology: Preparing for Change”, Accenture; Ross, Rory (2015 Sep. 12).“Smart Money: Blockchains Are the Future of the Internet”, Newsweek;Wigan, David (2015 Jun. 11). “Bitcoin technology will disruptderivatives, says banker”, IFR Asia.

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Liquidity, the ability to efficiently convert asset value to cash ondemand, is a key characteristic of optimal markets. Likewise, hightransaction costs, inability to liquidate an asset on demand, anddiscounting of an asset in order to facilitate a transaction representmarket inefficiencies. Many investment opportunities, such as emergingtechnologies or real estate projects in the developing markets, offersignificant earning potential but suffer from a lack of liquidity.Despite the potential for return, earning potential for these assetclasses may remain dormant. Asset liquidity may be limited to due tolack of information, individual asset risk, uncertain market conditions,large transaction sizes, and irregular or infrequent payouts.

A particular class of assets involve resources capable of generating orproducing commodities at a predictable cost (i.e., assets for whichthere exists a robust market with high efficiency), but which themselveshave limited liquidity because of the cost, time, and risk of bringingthe asset to commodity status. These assets are thus ultimatelyvaluable, but suffer significant discounts beyond the predicted cost ofcommoditization. For example, mineral deposits which produce commodityminerals fluctuate based on the value of the mineral, but sufferdiscounts far in excess of the cost of extraction. Further, because thevalue is intrinsic to the deposit, the use of the asset forsecuritization depends on the extractability of the resource, and notits actual extraction, permitting leverage of the capital investmentindependent of the mineral business. Indeed, because the market forcommodity minerals may fluctuate or suffer cyclic pricing, it may beinefficient to extract mineral deposits under all circumstances, yetliquidity of the underlying real estate or leases is a significant riskon owning or lending based on these deposits.

Currently, a company which owns a source or means for production of acommodity may borrow at interest from a lender secured by the assets, orsells equity which intrinsically shares in the profits of production, oroffers some hybrid security. While an equity holder may have liquidityin selling the shares, the value of the shares is heavily weightedtoward the profits made from operations, and negatively impacted by thesize of the capital investment involved. Meanwhile, a debt lender (e.g.,bondholder) typically has more limited liquidity, and even if thesecurity interest is sufficient to ensure eventual payment, the defaultrisk for the borrower remains a critical factor in liquidity

SUMMARY OF THE INVENTION

The present technology provides various solutions addressing theseissues. It converts an illiquid asset which represents demonstrable andrecognized wealth, into a liquid resource, typically without requiringthe illiquid asset itself to be monetized. A contingent interest in realproperty rights (e.g., a security interest) permits, upon conclusion ofa smart contract, a counterparty to the asset owner, to force eithercompliance with the terms of the smart contract, e.g., repayment of thetokens, or have available legal remedies available under the contingentinterest. In a preferred embodiment, the smart contract requires returnof the same number of tokens as were issued to the asset owner, in orderto release the contingent interest. This permits a distributed ledger tobe a complete an accurate accounting means for the tokens, from creationto extinction by completion of the cycle. Of course, more complex termsare possible, such as a fractional or surplus return ratio. In apreferred embodiment, a substitution is possible, which serves to securerelease of the contingent interest, absent return of all tokens, forexample in case of unavailability or pricing disparity.

In general, a borrower seeks to monetize a capital investment in aproductive resource that has a predictable cost of production of acommodity, and other predictable (and/or insurable) risks. A buyer,lender, or issuer seeks to securitize the investment by creating asalable and tradable token, guaranteed by the value of the security(security interest), and subject to a “smart contract” which limitsunpredictable human-factor risks, so that the value of the loan can beimmediately off-loaded into public markets. Finally, public marketsacquire the tokens, which have advantages over cash, in terms oftransferability, security, and in some cases (i.e., unstable politicalregimes), asset backing. The tokens are ultimately backed by a securityinterest in the productive means, and may have a discount in excess ofthe cost of extraction or production, at least at issuance. The tokens,once issued, have a fundamental value, tied to the security interest andsmart contract that governs it. Therefore, in contrast to a fiatcurrency, the tokens are less correlated in value with politicalinstability, inflation, devaluation, foreign trade balance, and thelike. On the other hand, the token would typically have a valuepositively correlated with the value of the underlying security asset,and the commodity to which it pertains.

The tokens may be tied to a single smart contract, or issued backed by aportfolio of secured assets. A typical smart contract will have apredefined term, such as 10 years. At the end of the term, the borrowermust acquire the tokens at market price, or provide a permittedalternate. In a preferred embodiment, the smart contract authorizes aright of substitution, wherein the borrower may release the securityinterest by depositing with a reliable repository, a predeterminedamount of the commodity, and at termination, the holder(s) of tokens canoffer their tokens to the original source, presumably at or near theunderlying commodity value, as of the expiration of the contract. Inanother scenario, the token holders receive the commodity itself, andnot its value, though in most cases, the commodity is represented by aliquid right in a defined currency. The fixed expiration date permitsdeposit of commodities futures contracts as the substituted assets,rather than the commodities themselves, which further reduces theeconomic inefficiency of the securitization.

The preferred implementation permits a renewal of the smart contract,such that an actual transfer of the commodity is not required. Thus, thesmart contract can be renewed, with underwriting performed inanticipation of renewal to verify that the secured assets haveappropriate value, etc.

Users of the tokens may therefore anticipate variations in demand overtime. However, while the security for the particular tokens may differ,the smart contract is designed and intended to provide sufficient marginbetween the security interest and likely range of values such that theyare fungible, and various tokens for the same commodity would assume thesame market value.

In some cases, the tokens will rise to a value above a right ofsubstitution value or security interest value. In this case, there maybe differences between tokens, but in that case, there would be anincentive for bowers to substitute the security as the commodity or acontract right for the commodity, and thus achieve fungibility in thatmanner. When the value of the token rises above the securitization, theresult is somewhat similar to the pricing of non-securitizedcryptocurrencies, i.e., the pricing is dependent on scarcity of thetokens and a demand established by usefulness or speculation. However,in contrast to current unsecuritized cryptocurrencies, the securitizedtokens have a right, at smart contract termination, to liquidation atthe exchange price for the commodity. Further, if the tokens are fullysubstituted (a likely occurrence if the token value exceeds thecommodity exchange value), the smart contract may go into automaticrenewal (with a right of token redemption), and thus expiration risk fortoken-holders abated. Therefore, the tokens have a minimum valueexpressed in a commodity exchange rate at or after smart contractexpiration, and no maximum value.

The scarcity of the tokens is guaranteed by the limited nature ofcommodity production or creation facilities, and the securitizationdiscount.

To the extent that commodities market risks are deemed unacceptable orundesired, the tokens may be backed by various types of portfolios thatmitigate desired risks. Likewise, risks may be concentrated if desired.For example, instead of securitizing tokens based on a mineral mine orthe like, the borrower may simply deposit futures contracts in exchangefor tokens, which are then sold to raise cash. If the borrower owns aproductive resource for the subject commodity, the future contract maybe written based on production and fulfillment by the borrower. However,this is not required, and the borrower may engage in side transactionsto fulfill its eventual obligations, so long as the security interestmeets the smart contract and underwriting criteria.

Blockchain technology provides various known advantages. For example,entries made on the blockchain are permanent, immutable, andindependently verifiable. Therefore, the use of blockchains isparticularly valuable for verifying ownership of a token, recordingtransfers of tokens, and auditing transactions. The present technologydoes not require, and a preferred embodiment does not include,anonymity, and therefore parties to a transaction may be authenticatedusing biometrics, multifactor authentication, or various means. Thisavoids the need to rely on passwords or cryptographic credentials alone,as with some cryptocurrencies. Thus, a human service may be employed toverify participants in transactions. On the other hand, anonymoustransaction capability is also possible.

The use of tokens provides advantages with respect to currencies,commodity trades, barter, contract obligations, and other paymentmethods. Currencies can require conversions, which incur costly andrisk. Commodity trades may require delivery of significant quantities ofmaterial, storage (with required physical security), transactionalcosts, pricing fluctuations, etc. Barter has similar issues withcommodities, but also incurs liquidity risk. (If an exchange is withrespect to a liquid asset, it is either a security or a commodity, if itis neither, it would be considered a barter). Contract rights, such asfutures, incur the risks of the underlying security or commodity, butalso a greater pricing fluctuation risk to contract termination, andlikely higher transactional costs.

The token according to the present technology has some characteristicsof a derivative of a forward contract, with the advantage that, whilethe value of the token is secured by the value of the resource capableof delivering the commodity (with certain investment in delivering thecommodity less than a differential between the value borrowed and thepresent value of the resource), and there is no actual requirement todevelop the resource to deliver the commodity, maintaining efficientoptions for the borrower. The derivative, however, has characteristicsof a virtual cryptocurrency, with asset backing, which can reducevolatility. While there is technically no limit on demand-basedincreases in the value of the tokens, and thus opportunity forspeculation, according to a preferred embodiment, the borrower has aright of substitution, and therefore the risk of specific demand by aborrower seeking to recover the tokens and retire the debt, andtherefore an opportunity for a hold-out, is limited. Further, thetechnology does not particularly seek to limit the amount ofasset-backed tokens generated, and therefore scarcity of the class oftokens is not a driving principle for valuation. Therefore, themotivations for pricing volatility are limited, resulting in acryptocurrency or cryptoasset token whose basis for valuation is theasset backing and usefulness in or in conjunction with commerce.

Typically, the tokens are fully fungible, and are issued inundistinguished form and as part of an indistinguishable pool. Withrespect to particular issuances, it is possible that a certain resourcewill turn out to be over-valued or fraudulent, and as a result, thetokens issued based on that resource lack asset backing. Since wepresume that there are other tokens available in the same class that areproperly asset backed, this would tend to negatively impact thevaluation of those particular tokens. Of course, steps are taken duringunderwriting to avoid this possibility, but it is also possible toacquire insurance on the assets to assure the value of theirsecuritization. When tokens are separately tracked, as compared to anormal token, a token under which the borrower has defaulted, and asurety is invoked may be worth more than other tokens, leading to higher“special” demand for riskier tokens. On the other hand, if the tokenvalue is above redemption, the special tokens will be worth less.Therefore, a speculation opportunity is provided in this case.

If, upon termination of a smart contract, there is a default, and thesecurity interest must be liquidated, it is possible that an investmentis required to extract the resource to fulfill the contract. In thatcase, an administrator, trustee, receiver, or the like (as specified bythe smart contract and underlying agreements) assumes control over theresource. Because of the margin between the debt amount and the value ofthe commodity that may be extracted from or produced by the resource, itis likely that the estate can be managed to fulfill its responsibility.Indeed, there may be cases where the token-holders are advantaged (atleast theoretically) as compared to those holding tokens fromnon-defaulting debtors. Thus, a perverse incentive may occur wheredemand is high for the lowest “quality” tokens, due to an arbitrageopportunity at contract termination. For example, in a non-defaultingcase, the debtor must acquire the previously issued tokens or deliverthe substituted assets. Therefore, the market price for the tokens willbe driven by the substitution paradigm, which is generally the samecommodity as produced by the resource (though this is not a theoreticalconstraint). On the other hand, in the defaulting case, the debtorpresumably lacks the liquid assets to re-acquire the tokens at marketprice, and lacks the commodity to fulfill the substitution, leading to apossibility that the rational market price is above the substitutionvalue, especially if the terms of default provide an advantage to thetoken-holder, such as an above-market interest rate for delayed payment.Further, because these defaulting tokens become “special”, and the smartcontract under which they are issued will not be renewed, the expiringtokens may be subject to increased demand, and thus higher prices.

This is not to say that the system is design to include perverseincentives which drive objectively antisocial behavior and seemingirrational results. Rather, the terms of the smart contract may bedesigned to correct for aberrant conditions, and to ensure that tokenholders are assured of the asset backing under all of the variousconditions, leading to a lower risk discount and reduced correlation ofrisks between the tokens themselves and external market-specificconditions. Thus, the tokens become available for cross-bordertransactions, use in unstable economies, during fiat currencycontractions, and especially in transactions loosely linked to thecommodity which secures the tokens. While the tokens may be initiallyissued in a private transaction, such as a financing of an acquisitionof a mine, or expansion of a mine, they would become available forgeneral transactions as an alternate to cryptocurrencies, and due totheir characteristics designed to limit speculation-driven volatility,and artificial scarcity (i.e., scarcity due only to the fact that thetokens have limited liquidity and availability), the tokens become agood fit for use in consumer and business-to-business transactions.

The key advantage of the tokens over cash derives from their originationin an asset securitization transaction, which is designed to be moreefficient, and yield lower discounts of net asset value to liquidityachieved, than traditional bank lending, and perhaps equity issuance.Thus, the generation of the tokens according to the present technologyalleviates an artificial scarcity of fiat currencies, under traditionalloan paradigms, thus unlocking vast amounts of wealth. Once unlocked,the tokens continue to represent an advantage over fiat currency in thatthey are readily exchangeable for fiat currency on an exchange or in atransaction, and are also backed by hard assets, a feature missing fromfiat currencies.

Typically, the present technology is implemented in a manner fullycompliant with all banking and securities laws, and the use oradvantages of the technology are not predicated on US tax avoidance, UScurrency transfer restriction evasion, etc. However, the exchangenetwork is independent of the financial services oligopolies, such asThe Clearing House (New York), credit card networks (Mastercard, Visa,Discover, American Express, etc.), etc., and therefore is free tocompete by providing lower cost, better service(s), advantages, etc.

According to another embodiment, the token system is tied tocommodity-specific investment or speculation. For example, if a userseeks to invest in diamonds, gold, platinum, etc., he or she may acquiretokens having such characteristics. Typically, these would be tokensthat have a high proportion of substituted assets in the form of therespective commodity, whose pricing is highly correlated with thecommodity, and whose smart contract assures that significant deviationbetween the token price and the redemption price with respect to theunderlying commodity are well aligned. Indeed, in such a scenario, shortor staggered terms of the smart contract may be desired, so thatspeculation on commodity pricing over time can be effectively managed.Further, in some cases, the token owner may be provided with a right ofdemand, for example, to acquire an amount of the underlying commodity inexchange for the token. This would have the effect of converging thetoken price with the demand value as the contract nears expiration, andalso permits use of the tokens as a market hedge, while maintainingliquidity.

Another issue involves international currency and financing issues. Forexample, a non-US commodity miner seeks to finance production of goldoutside the US. Typically, a security interest in real estate or abusiness is recorded in the jurisdiction in which the business islocation, and is denominated in the currency of that jurisdiction. Thisimposes difficulties where a lender does not wish to incur currency riskfor the particular jurisdiction, but is quite willing to incur thebusiness risk inherent in the loan, if denominated in commodity value.Therefore, the present technology provides a means to secure the loan,which in theory does not violate currency export restrictions of thejurisdiction, since at contract termination, the commodity itself may bedelivered. The loan, in the form of the tokens, then represents aderivative of the value of the commodity, at least when issued, and nearexpiration, especially in a non-renewable smart contract. For arenewable smart contract, the value of the tokens is largely limitedunilaterally, in that if the tokens exceed the market value of theunderlying commodity, there will be a large incentive for the borrowerto substitute commodity for tokens, thus tying their values together.However, if the commodity value is less than the token value, the tokenwill remain floating in value.

Because of the discount between the value of the secured assets and theamount of the security, the tokens have a fair market value over equityin the resource. Therefore, the tokens have another basis for valuation,and another possible value correlation. In the event that the companythat manages the resource becomes illiquid and its business prospectsdim, the tokens assume properties similar to that of a secured lender.The redemption at contract expiration, in this case, appears as a zerocoupon bond. The option of renewal of the contract, if provided, mayprovide the token-holder with an ability to cash out, but in any casetypically requires a new underwriting process that assures that thevalue of the security interest is discounted well below the amountoutstanding.

Therefore, the particular rules and features of the smart contract willdefine future risks and rewards of the participants, and can vary over abroad range of parameters. For example, instead of emulating a zerocoupon bond, the tokens may yield dividends or pay interest. If this isa direct payment, this incurs tracking and tax reporting that mightresult in difficulties. However, as built into a smart contract, theresult may be a programmed increase in value of the tokens over timewith respect to redemption value, right of substitution amount, or othertime-dependent features which are predicted to drive the value of thetokens up over time toward the expiration.

The present technology therefore features an asset which is subject to alegally-enforceable security interest, to secure a debt, which may bedenominated in currency or a value of a commodity. In exchange for asum, a series of tokens are generated and issued. The tokens are subjectto a contract which provides for a future redemption, at a value securedby the security interest. The contract itself may be a smart contract,which includes automatically implemented rules and features, which insome cases may be independent of sovereigns, and has aspects which areenforced independent of the parties and their agents. The tokens may betraded on an exchange which relies on a blockchain. The futureredemption may provide different options, such as currency, commodities,renewal upon terms, or otherwise.

In a preferred embodiment, the security interest is in a gold mine, witha debt of less than 20% of the proven reserves of the claim, after a duediligence investigation of the value of the claim and its productivecapability, such that extraction of gold sufficient to redeem the tokensis commercially feasible without exceeding the value of the securedassets. The term may be 10 years, with a right of substitution at parvalue at any time over the term. At expiration, the borrower mustreclaim all of the tokens, or substitute security in the form of apre-specified amount of gold. However, upon redemption of any token, theborrower may reissue the debt as a new token, subject to a new smartcontract. A term of the smart contract permits a token-holder with anoutstanding token to automatically exchange tokens for replacementtokens, thus leaving pending transactions and markets uninterrupted.

The issued tokens are available for various transactions, similar toother known cryptocurrencies, and are traded on exchanges with respectto different currencies, tokens, or commodities, or between individualson a secure digital ledger, which may be a blockchain.

The right of redemption may permit substitution of other tokens, havingdistinct security, which meet system-wide criteria, and therefore thetokens become fungible. However, each debtor remains responsible atcontract termination to fulfill its obligations, or the securityinterest may be foreclosed. When the process is aggregated for a numberof borrowers, the management of redemption, substitution, andforeclosures becomes a normal business activity, and therefore can bemanaged accordingly. Further, the aggregation leads to greaterliquidity, reduced search cost and individual risk speculation, and moreorderly markets. Further, from the perspective of a token-holder,default risks are also aggregated, and therefore have lower volatility.

In some cases, the value of resource subject to the security interest isfar in excess of the value of the debt, and respective tokens. Oneoption is, rather than issuing all tokens having the same value, a setof tranches of tokens, which represent priority of liquidation in eventof default. This has the effect of creating tokens with greater andlesser degrees of correlation with the underlying business involved inthe secured resource. The tranches may also have other differences.Thus, it is possible to create derivatives which largely isolatedifferent risks, and thus satisfy different investment objectives.

In some cases, the security is not in real estate, mines or leases perse, but may be with respect to in-process inventory. For example, mined,unrefined ore may be subject to the monetization transaction, with theredemption based on a fraction of the metal or mineral contained in theore. Therefore, the technology may be used for short term businessfinancing. As the ore is processed, if the tokens are not redeemed, theminer may replace the ore to maintain the pool or secured assets.

As discussed above, the smart contract may be insured. This permits aninsurer, such as an insurance company, to assume various risksindependent of the token values, and may therefore arbitrage the marketvalue of the tokens with respect to the implied insurance risk. Thistherefore incentivizes the insurer to act as a market-maker with respectto the tokens under various circumstances, assuring liquidity andorderly markets for the tokens. Even if the smart contract does notrequire a captive sinking fund, an insurer may require this as a term ofthe contract. The use of insurance is one way to make different tokensfungible; if tokens having various underlying distinctions are insuredto have the same risks (e.g., a common guaranty by the same insurancecompany), then the markets may treat these as being of the same type.This can be reinforced if the right of substitution includes alternatetokens (though this will generally sink the market value to the lowestvalued token, which may be undesirable from an efficiency standpoint).

The blockchain employed is preferably the Symbiont system, which is apermission-based blockchain. See, symbiont.io/technology/.

By applying the power of a distributed ledger and smart contracts, thepresent invention can offer commodity asset owners a method to attainliquidity from their pre-commodity assets by digitizing those assets,and providing a new liquid asset representing a liquid derivative of thepre-commodity assets. These new liquid assets are derived from afractional representation of the commodity assets. Commodity assetowners who desire liquidity can use this fractional representation (thenew liquid asset) for alternative financing. This method willconsiderably speed up the process of gaining liquidity while allowingthe asset owner to avoid ongoing financing charges.

The digitization of commodity assets allows for the entry of previouslyexcluded asset classes inti the existing securitization marketplace. Theproblem was previously addressed through a traditional and lessefficient securitization market. In the current marketplace, apre-commodity asset owner can go to a lender and securitize thepre-commodity assets thereby gaining liquidity. The problem with thecurrent model is that it is painfully long and expensive due to the deepdiscounting of the value of the pre-commodity assets as well as ongoinginterest charges due to the business model to the lender.

The previously available solution was not fully satisfactory because itrequired ongoing finance charges as well as steeper discounting of theunderlying assets. The known solutions require that there be a one toone relationship between the commodity asset holder and the lender.Because of this, the commodity asset holder is typically restricted inhow to use the borrowed funds. The funds received were simply cash inthe bank and not further available for securitization or other advancedfinancing techniques including the ability to sell to and/or repurchasefrom third parties.

These, and other objects and advantages of the present invention areachieved in accordance with the preset invention by the method accordingto the invention. In one preferred embodiment, the method is forcreating precious metal backed token assets, secured by unrefinedprecious metal reserves, utilizing blockchain and/or distributed ledgertechnology. It is of course understood that other unrefined orpre-commodity reserves can be digitized in accordance with the presentinvention. Typically, if the assets achieve commodity status, there areexisting markets that can be employed; however, such assets are notexcluded by the present technology.

Similarly, non-commodity assets may also be securitized, with a slightlydifferent security predicate. For example, an income-producing realestate investment trust can be monetized according to the presenttechnology. In terms of substitution or replacement, the optionsinclude, for example, real estate interest substitution, heterogeneousasset or commodity type substitution, cash substitution, or othersecurity.

In accordance with one preferred embodiment of the present invention,the digitization of illiquid pre-commodity assets creates a liquidasset, utilizing smart contracts and distributed ledger technology. Thecommodity asset holder is required to pledge the assets into acollateral pool for digitization and representation on the distributedledger. Once recorded on the distributed ledger as inventory, thecollateral will be used to digitize a fractional representation of thecommodity assets.

Digitization occurs on the ledger via a smart contract. The smartcontract contains all the necessary parameters needed to digitizeincluding (but not limited to) the commodity asset description, theowner, the quantity, the location and the appropriate risk adjusteddiscount for the commodity asset and the title for the duration of thesmart contract. The terms of digitization embedded in the smart contractallow for the allocation of the fractional representation of thecommodity asset to the commodity asset owner. Also, embedded in theterms of the smart contract, is a maturity date which triggers therelease of any pledged collateral back to the commodity asset ownerwhile simultaneously requiring the return of the original fractionalrepresentation to the collateral pool. The commodity asset owner hascontrol of the now liquid fractional representation created from thecollateral. Of course, other encumbrances or side-deals may take place,represented in smart contracts or otherwise.

It is therefore an object to provide a token, representing an interestin a smart contract, the smart contract representing an agreement,secured by a security interest in the real property or a right in realproperty, to return the token within a predetermined period.

It is a further object to provide a method of defining a token,comprising: defining a smart contract, representing an agreement,secured by a security interest real property or a right in realproperty, to return the token within a predetermined period; pledgingthe real property or a right in real property to secure the securityinterest in the smart contract; and issuing the token. The method mayfurther comprise returning the token, and releasing the real property ora right in real property from the security interest. The smart contractmay be implemented in conjunction with a distribute ledger. The methodmay further comprise exercising a contingent property interest, e.g.,the security interest, in the real property or a right in real property,after the predetermined period if the token is not returned.

The token may represent a fractional interest in the real property or aright in real property.

The smart contract may be implemented in conjunction with a distributeledger.

The predetermined period may be tolled if a substitute asset istendered.

The real property or a right in real property may comprise a mine havingproven available reserves of the substitute asset. The substitute assetmay be gold. The proven available reserves may be a predeterminedmultiple of the substitute asset.

The token may be generated as a transaction of acryptographically-authenticated, distributed ledger comprising adatabase held and updated independently by each of a plurality ofdistributed elements, forming a consensus determination of transactionvalidity.

The agreement, secured by a security interest in the real property orthe right in real property, may be terminated if the token is returnedwithin the predetermined period, else a contingent property interest,e.g., the security interest, in the real property or a right in realproperty, may be exercised.

It is a further object to provide a method for creating a liquid tokenrepresentation from an illiquid asset comprising: receiving a pledge ofan illiquid asset; and digitizing the illiquid asset into fractionalrepresentations using a smart contract on a distributed ledger network,the fractional representations being secured by the pledge of theilliquid asset as collateral. The method may further comprise trading afractional representation on an exchange, recorded in a distributedledger network. The smart contract may comprise an illiquid assetdescription, an illiquid asset owner, a quantity, and at least oneredemption rule. The at least one redemption rule may comprise amaturity date which triggers a release of the pledged illiquid asset ascollateral back to the illiquid asset owner in exchange for return ofall of the original fractional representations. The illiquid asset maycomprise ore of a precious metal. The precious metal may be gold.

It is a still further object to provide a distributed ledger comprisingterms of at least one smart contract representing an agreement whichimposes a security interest in real property rights, comprising a termwhich authorizes creation of a token subject to the security interest,and subsequently deactivates the token and releases the securityinterest upon fulfillment of the smart contract terms.

It is another object to provide a computational node of a distributedcommunication network, configured to execute a portion of a distributedledger comprising at least one smart contract representing an agreementwhich imposes a security interest in real property rights, comprising acontract term which authorizes creation of a token subject to thesecurity interest, and subsequently deactivates the token and releasesthe security interest upon fulfillment of the smart contract terms.

The smart contract may comprise at least one term which imposes apredetermined period during which the terms must be fulfilled. The smartcontract may comprise at least one term which provides a right tosubstitution to toll a foreclosure of the security interest. Thedistributed ledger may be provided in combination with computationalnodes of a distributed communication network, configured to authenticatetransactions involving the token, and automatically execute the terms ofthe smart contract, without centralized control.

These and other features of the present invention will become apparentfrom the drawings and the following detailed description.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a block diagram of the distributed ledger (blockchain) Networkused by a method according to the present invention;

FIG. 2 is a flowchart of a first embodiment of the method according tothe present invention;

FIG. 3 shows a flow diagram of underlying asset verification andvaluation;

FIG. 4 is a flowchart of a second embodiment of the method according tothe present invention;

FIG. 5 is a flowchart of a proposed information flow according to thesecond embodiment of the invention; and

FIG. 6 is a state diagram of a sovereign-backed securitization modelaccording to the present invention.

DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS EXAMPLE 1

FIG. 1 shows a block diagram of the network utilized in accordance withthe method of the present invention. At the heart of the system is adistributed ledger (e.g., transaction chain or blockchain) network 10preferably implemented on the Internet and providing a distributedledger, which is immutable. The network may use public key/private keycryptography to insure identification integrity and other algorithms toinsure trust before a block of at least one transaction is added to thedistributed ledger. The network can be implemented on any platforms thatpermit the running of smart contracts, such as the Hyperledgerblockchain, Symbiont.io or the Ethereum blockchain.

Connected to the network 10 is a commodity asset owner 20 who isinterested in pledging illiquid assets, such as unrefined gold that isstill in the ground, to 3 create a liquid asset. Also connected to thenetwork 10 is a digitizer party 30 who agrees to take the pledge of theilliquid assets subject to terms enforced in smart contracts running onthe network 10, and digitize the asset into fractional representationthat can be sold to account holders 40. For example, if the commodityasset was unrefined gold for which the owner can demonstrate that thereis a proven gold reserve, the digitizer will provide 1 fractionalrepresentation (e.g., an Orebit.au) token for a defined amount ofReserves of gold. The assets will be pledged for 10 years, after whichthe asset owner must replace the entire reserve that was fractionalized.

The token can be sold to account holders on the network and eachtransaction is recorded immutably in a block on the distributed ledgerto establish unquestionable ownership rights. The smart contracts, whichare computer programs designed to operate on the distributed ledgernetwork and carry out the terms of the method, automate the process andeliminate the need for human intervention in many steps.

FIG. 2 is a flowchart of one embodiment of the method according to theinvention. According to the method of FIG. 2:

A reserve is created by the asset holder. A first Smart Contract createsthe inventory of the total amount of reserves being placed in the poolby the asset holder for digitization.

The diamond indicates that an executive must sign off on the reserveonce it is created before it can go to the ‘Signed Off’ state. If thereis no sign off, the system waits for the proper approval.

If the reserve has been approved (signed off), it is now ready to bedigitized by the digitizer party using a smart contract process.

In order for the digitization to occur, the digitizer runs a secondsmart contract which is called an ‘ADSA’ (Asset Digitization ServiceAgreement) which is shown in a flow diagram in the second column. Thiscontract knows the haircut (discount) and also is where the digitizerparty puts in the maturity date, the digitization date and whendigitized, creates the tokens. This is also where the digitizerassociates the ADSA to a reserve and the number of tokens created for aparticular reserve can be seen.

The created ADSA now waits for executive sign off similar to the reserveto create an object.

Once the digitization date is reached the reserve is bound, the ADSA ismarked digitized and the tokens are created. FIG. 2 illustrates thatuntil the digitization date comes and digitization occurs, the assetholder can still back out. However, if the digitization occurs, there isno backing out.

The ADSA now distributes the tokens created to the asset holder, andalso deducts relevant on-ledger fees which are paid to both the networkoperator and the digitizer party.

The 10-year period now begins and after the maturity date, everythingunderneath happens at termination, i.e., the debt is repaid, the tokensare destroyed (e.g., redeemed and/or retired), the ADSA is terminatedand the Reserve is terminated as long as there are no associated ADSA's.

Specifically, on termination the ADSA will look at the asset holder'saccount and sweep the tokens (exactly the number that was digitized)back for inactivation so that the lien can be lifted off the reserve.The inactivation, redemption, or retirement of a token is a transactionon the distributed ledger that labels the tokens with an updated status,to alert future buyers of that status, which would normally render themvalueless, and thus block future transactions. (Note that, according toexisting non-asset backed cryptocurrencies, the lack of asset backingdoes not preclude use, so technically, the transition from asset-backedto non-asset backed does not require that no party attribute value tothe redeemed tokens.)

If for some reason the number of tokens in the asset holder's accountare less than the original amount created the process goes into adefault scenario. In event of a default, the legal process offoreclosure on the secured assets proceeds, and this provides securityfor the token-holders. Since the amount of feasible asset recoveryexceeds the redemption value of the tokens, it is most probable that alltoken holders will be made whole, and indeed, the default process maymake outstanding tokens more valuable than those that are redeemed inthe normal course.

As a result of the method of the present invention, fungible liquidityis obtainable from commodity assets in various states of extraction ornon-extraction and refinement. The method can create liquidity frompre-refined, combined and disparate commodity assets for each of thosedisparate commodity assets.

EXAMPLE 2

System Architecture

It is a challenge for typical investors to get exposure to unrefinedassets while, at the same time, owners of such assets often struggle toaccess liquidity. Asset digitization can provide investors with exposureto illiquid assets in a form that can be easily registered, traded andtransferred. It also provides owners of illiquid physical assets with anopportunity to access new sources of liquidity. A distributed ledgertechnology platform is ideal for asset digitization because it providesan immutable record of the origination and provenance of digitizedassets as well as a tamper-proof repository for all documentationsupporting a given origination.

Tokens created according to the present paradigm are fundamentallydifferent from most blockchain or distributed ledger offerings. Two coredifferences are that they are a cryptoasset, and not a cryptocurrencyloosely backed by a hard asset, and directly represent the hard assetwhich is available as security for the set of transactions. The tokensare not decoupled from central management or rules of law. The platformis de-centralized from a resiliency and technological perspective but itis centrally managed by a service company. Unlike cryptocurrencies, suchas Bitcoin or Ethereum, which are not centrally governed, it does notmake sense to decouple a hard asset, which is subject to rules andregulations nor would you want to. Therefore, the divergence on thisissue is both fundamental and philosophical. Since the linkage to a hardasset affords contingent property rights, the ability to operate withand within law is important. The same rules and regulations that protectthe hard asset, i.e., preventing someone from usurping ownership ofmineral rights, will protect any investment in the tokens, or theunderlying smart contract. The tokens are subject to rule of law, andcan and will be transferred in accordance with court rulings.

The hard asset backing the tokens may be, for example, proven reservesof unrefined gold. Primarily this will be in the form of in situ golddeposits but could include gold assets in interim stages of the refiningprocess including head ore, concentrate, miner bars, and doré. Thetokens represent a single mineral or commodity, and tokens tied todifferent security types will generally not be fungible among assettypes. However, it is possible to define diversified pools, whichconsistently represent a plurality of asset types in predeterminedratios. Each token is fungible so a token from one source is equivalentand interchangeable to a corresponding token from another source withoutthe need to trace its provenance. However, the provenance of each andevery token is traceable within the pool and documented. The history ofevery transaction is stored in an immutable and tamper-proof ledgeralong with all supporting documentation.

Previously there was no platform for lending against unrefined provenreserves of gold. With this model, a secure auditable platform enablesthese transactions.

To validate the mineral deposits of any reserve or claim, one can usethe “Canadian Institute of Mining” (CIM), National Instrument 43-101 (NI43-101) guidelines for reporting. The NI 43-101, although Canadianbased, is commonly used throughout North America, and eveninternationally. Although it is common to North America, the CIM/NI43-101 reporting guidelines adhere to the “Committee for MineralReserves International Reporting Standards” (CRIRSCO). In the future,other CRIRSCO member guidelines may be used, including but not limitedto the Australian “Joint Ore Reserves Committee” (JORC) reports. Each NI43-101 report is conducted by an independent “qualified person(s)”. At aminimum, the qualified person must be an experienced and accreditedengineer or geoscientist with experience relevant to the subject matterof the mineral project (NI 43-101, 2011, p. 4). This report may becommissioned by the claim or reserve holder, but it is not carried outby the holder.

In order to understand the NI 43-101 report, the following definitionsare required:

A Mineral Resource is a concentration or occurrence of solid material ofeconomic interest in or on the Earth's crust in such form, grade orquality and quantity that there are reasonable prospects for eventualeconomic extraction.

The location, quantity, grade or quality, continuity and othergeological characteristics of a Mineral Resource are known, estimated orinterpreted from specific geological evidence and knowledge, includingsampling.

Mineral Resources are sub-divided, in order of increasing geologicalconfidence, into Inferred, Indicated and Measured categories. AnInferred Mineral Resource has a lower level of confidence than thatapplied to an Indicated Mineral Resource. An Indicated Mineral Resourcehas a higher level of confidence than an Inferred Mineral Resource buthas a lower level of confidence than a Measured Mineral Resource.

The full report goes into greater detail on each Mineral Resourceclassification, however we are mainly concerned with minerals with thehighest degree of confidence and those which can be converted intoproven reserves. The following is a definition of a measured mineralresource:

A Measured Mineral Resource is that part of a Mineral Resource for whichquantity, grade or quality, densities, shape, and physicalcharacteristics are estimated with confidence sufficient to allow theapplication of Modifying Factors to support detailed mine planning andfinal evaluation of the economic viability of the deposit. Geologicalevidence is derived from detailed and reliable exploration, sampling andtesting and is sufficient to confirm geological and grade or qualitycontinuity between points of observation. A Measured Mineral Resourcehas a higher level of confidence than that applying to either anIndicated Mineral Resource or an Inferred Mineral Resource. It may beconverted to a Proven Mineral Reserve or to a Probable Mineral Reserve.(CIM Definitions, 2014)

Measured Mineral Resources offer the highest level of confidence suchthat there is sufficient sampling and testing to confirm grade orquality between points of observation. However, to be accepted by thepresent system, the analysis must also ensure the economic feasibilityof the deposit. The presence of gold is insufficient if it is in suchlow concentration that extraction is not economical, or if there arelegal or environmental restrictions. The NI 43-101 also takes this intoaccount as well as defined by “Mineral Reserves”:

A Mineral Reserve is the economically mineable part of a Measured and/orIndicated Mineral Resource. It includes diluting materials andallowances for losses, which may occur when the material is mined orextracted and is defined by studies at Pre-Feasibility or Feasibilitylevel as appropriate that include application of Modifying Factors. Suchstudies demonstrate that, at the time of reporting, extraction couldreasonably be justified. The reference point at which Mineral Reservesare defined, usually the point where the ore is delivered to theprocessing plant, must be stated. It is important that, in allsituations where the reference point is different, such as for asaleable product, a clarifying statement is included to ensure that thereader is fully informed as to what is being reported. The publicdisclosure of a Mineral Reserve must be demonstrated by aPre-Feasibility Study or Feasibility Study. (CIM Definitions, 2014)

It is important to understand that the Modifying Factors are not limitedin scope to just the economics of the extraction process:

Modifying Factors are considerations used to convert Mineral Resourcesto Mineral Reserves. These include, but are not restricted to, mining,processing, metallurgical, infrastructure, economic, marketing, legal,environmental, social and governmental factors. (CIM Definitions, 2014)

Once Modifying Factors are applied to the technical reports on theMineral Resource Estimates a new category of Mineral Reserves aregenerated including Proven Mineral Reserves:

A Proven Mineral Reserve is the economically mineable part of a MeasuredMineral Resource. A Proven Mineral Reserve implies a high degree ofconfidence in the Modifying Factors. Application of the Proven MineralReserve category implies that the Qualified Person has the highestdegree of confidence in the estimate with the consequent expectation inthe minds of the readers of the report. The term should be restricted tothat part of the deposit where production planning is taking place andfor which any variation in the estimate would not significantly affectthe potential economic viability of the deposit. Proven Mineral Reserveestimates must be demonstrated to be economic, at the time of reporting,by at least a Pre-Feasibility Study. Within the CIM Definition standardsthe term Proved Mineral Reserve is an equivalent term to a ProvenMineral Reserve. (CIM Definitions, 2014)

FIG. 3 illustrates the relationship between the confidence of testingand samples versus Modifying factors.

Once a claim with an NI 43-101 has been reviewed and the Proven Reservesof gold have been validated, the value of the collateral, for allintents and purposes, is pegged at 1:5. For every 5 troy ounces ofProven Reserves of gold, exactly one token is issued. Ultimately, thereis no definitive way to determine the value of the entire pledged claim,however, even by CRIRSCO reporting guidelines there is at least 5 timesas much feasibly extractable gold. There are also Indicated Resources,there are also Inferred Resources and it is likely there areaccompanying metals such as copper, molybdenum, silver and others thatmay or may not also have extractable value.

It is important to note that the pool is not purchasing the claims orthe owner of the derived assets, it is only a pool for managing thetitle. The title to a claim is fully pledged to pool for the life of theloan and is to be returned to the claim holder once the loan has beenrepaid at Maturity. The asset represented in the form of a token areheld by the account holder on initial digitization. The account holdermay then use the platform to exchange tokens to another account holder.That account holder may then transfer tokens to another account holder,who may or may not be the original claim holder. The nature of theagreement, and the exchange of any non-token assets including but notlimited to currency, stock or hard assets is between the two parties.

The services provided to run the pool include: the review and processingof Asset Digitization Service Agreement applications for perspectiveclaim holders; the digitization of claims into smart certificates knownas the token; the smart contracts to manage the lifecycle of the AssetDigitization Service Agreement; providing a secure platform tofacilitate the trading of token; to provide an immutable and auditablehistory of transactions and documents including but not limited to claimtitles. The services does not typically hold the derived value ofassets; set the value of token; negotiate the terms of any loans ortransactions; facilitate the transaction of assets other than token; orarbitrate agreements.

The business logic for the pool is codified within immutable SmartContracts. The Smart Contracts ensure the agreed upon rules arecorrectly adhered to for the lifecycle of the ADSA. There are (2)primary Smart Contract types: ADSA: which represent the AssetDigitization Service Agreement; and Reserve: which represent the titledasset, typically a claim. The Smart Contracts allow for optionalextensions. One such example is that presently only gold can bedigitized. However, a claim is a defined section of land with MineralResources and is not limited to a particular mineral type. Therefore,other asset types may also be digitized, and those assets will be boundto the same Reserve object. If the digitization start and end periods ofdifferent asset types within a Reserve are not aligned, freeing up thetitle of a claim prematurely would cause ownership issues. Therefore,the Reserve is a separate object and is bound until the last ADSA isterminated.

The Reserve object or Smart Contract represents the titled claim and hasthe following attributes: “approved_timestamp”; “approver_id”;“country”; “created_timestamp”; “creator_id”; “documents”;“geolocation”; “internal_reserve_id”; “last_modified_timestamp”;“last_(≥)modifier_id”; “owner_id”; “proven_reserves”; “ready”;“reserve_description”; “reserve_id”; “reserve_type”; “signed_date”;“state”; “status”; “terminated timestamp”; “terminator_id”.

The ADSA object or Smart Contract represents the fungible asset and hasthe following attributes:

“approved_timestamp”; “approver_id”; “country”; “created_timestamp”;“creator_id”; “documents”; “internal_reserve_id”;“last_modified_timestamp”; “last_modifier_id”; “owner_id”;“proven_reserves”; “asset_type”; “tokens”; “quantity”; “ready”;“reserve_description”; “reserve_id”; “reserve_type”; “signed_date”;“state”; “status”; “terminated_timestamp”; “terminator_id”.

The Substitution objects or Smart Contracts represent the Reserve andADSA equivalent except for Refined Gold. The only difference is thereserve_type for Reserve is substitution and the resulting ADSA quantityis digitized at a 1:1 ratio instead of the standard 1:5.

The flow chart in FIG. 4 traces a simplified Reserve/ADSA lifecyclethrough the various states. The reserve status may be: Pending, SignedOff, Bound, Terminated ADSA status: Pending, Signed Off, Digitized,Terminated. According to FIG. 4:

-   -   1. Asset/Collateral Holder initiates a claim for review; Reserve        (Pending).    -   2. The Reserve title is clear; Reserve (Signed Off).    -   3. The ADSA is submitted for review; ADSA (Pending).    -   4. The ADSA passes review; ADSA (Signed Off).    -   5. The Digitization date is set for the future; Reserve (Signed        Off)/ADSA (Signed Off).    -   6. The Digitization date arrives and token are digitized;        Reserve (Bound)/ADSA (Digitized).        -   a. The claim title is fully pledged to the pool.        -   b. The token are deposited into the Asset/Collateral            Holder's account.        -   c. The Asset/Collateral Holder may transfer token to other            accounts.    -   7. The Maturity date arrives and the original amount of        digitized token are removed from the account; ADSA        (Terminated)/Reserve (Terminated)        -   a. The claim title is returned.        -   b. The token are retired from the system.

It is possible to renew an ADSA past the original Maturity date, asdefined by the Smart Contract. In order to terminate an ADSA, theAsset/Collateral Holder must acquire the original amount of tokens fromthe market to be retired. All of the tokens are accounted for on thesystem, but it is possible there may not be any for sale. To account forthis anomaly an option exists for, and only for, ADSA owners who areapproaching the maturity date, to pledge Refined Gold from a vault forthe outstanding amount in a new Reserve. The original Reserve isterminated and the title to the claim is returned, however, there is anew obligation to recover sufficient tokens to release the pledgedRefined Gold.

In the event there are insufficient tokens to cleanly terminate an ADSAon the Maturity date, the ADSA will default. Because the circumstancesof each default are different and involve externalities, the SmartContract principally flags the issue for remediation. However, tomaintain the integrity of the platform, the only way to terminate anADSA is to fully return the Digitized token.

There is no concept of a complete cycle. The smart contracts allow forany number of valid combinations. An Asset/Collateral Holder couldDigitize an ADSA, renew, renew again, Digitize another ADSA, use thebalance with the new claim to Terminate the original ADSA, default onthe new ADSA, renew with penalties, pledge a substitution, Terminate thenew ADSA, then repay the substitution at a later date, for example.

In its simplest form of the system uses distributed ledger technology(e.g., provided by Symbiont) to create a new digital asset class. Whilethe term “blockchain” is the more widely recognized it is moretechnically correct to describe the platform of choice as a distributedledger platform because transactions are appended one at a time ratherthan in “blocks”. Indeed, in some cases, the technology may beimplemented in blocks. Despite this minor distinction, the ledgerretains the properties of traditional blockchains including replication,resiliency, immutability and enforced consistency. However, whenimplemented as a private ledger, many of challenges of the aroundprivacy and performance of public distributed ledgers are inherentlyaddressed.

The distributed ledger network may include trusted member nodes so theledger is never publicly exposed. Alternate technologies employcryptography that permit untrusted member nodes, which process thetransactions in a verifiable and authenticated manner without access tothe underlying data. Each member's data is encrypted and decrypted onlyby authorized members on the network. As a member, the pool leveragesSmart Contracts which strictly enforce predetermined business rules. Allactivity is recorded on a tamper proof, append-only ledger along withtimes stamps and digital signatures. The pool preferably operates on apermissioned network negating the need for mining to enforce consensus.The distributed ledger preferably uses an implementation of a ByzantineFault Tolerant algorithm (BFT-SMaRt, n.d.) that enforces consensusacross the network. This approach provides resilience and performanceorders of magnitude greater than mining, e.g., Bitcoin. All ledger datais encrypted and accessible only by authorized parties. When the poolqueries the Smart Contracts, the encrypted data is read from the ledger,which only the pool member is able to decrypt. (In an alternateimplementation, public verification is supported).

The news is full of stories where wallets have been compromised,cryptocurrency is stolen and there are few mechanisms to undo thedamage. Private or permissioned based platforms mean everyone on thenetwork or who has an account is a known entity who has passed a “KnowYour Customer” (KYC) and AML. Compromising the system to benefit aparticular account holder on a tamper-proof immutable ledger would behighly risky. In addition, since a service provider can administer thesystem, any transactions can be undone with complimentary transactions.This cannot be done in decentralized blockchains.

In addition to the data itself, the Smart Contract enforces businesslogic, which is also stored on the immutable ledger. Should a securityhole, error or bug be identified in a Smart Contract, the distributedledger platform may provide a straightforward mechanism for correctingit. Since all smart contract code is recorded as data on the immutableledger, all parties have a record of both the error and the fix, and mayemploy legal recourse as necessary.

Along with financial data there it is possible to store various legaldocumentation data on the ledger as well. Examples include PDFdocuments, signed and scanned legal documents and stamped geologicalreports among others. Data, documents and business logic are allencapsulated on an immutable ledger for a completely secure andauditable solution.

The system is resilient and tolerant of failures. It can scale. Mostimportantly, it is a cryptographically-enforced, append only, immutablechain of all the history since inception. It is an ideal system foraccountability and auditability. A permissioned distributed ledger addsno more attack vectors than the traditional stack while enabling fullauditability in the event if they did happen. The present system mayprovide customized and modular APIs to securely interface with theplatform.

A proposed information flow diagram is provided in FIG. 5.

REFERENCES

BFT-SMaRt. (n.d.). State Machine Replication for the Masses withBFT-SMART. Retrieved fromwww.di.fc.ul.pt/˜bessani/publications/dsn14-bftsmart.pdf

BusinessWire. (2017, Mar. 15). Orebits & Symbiont Deploy DistributedLedger Technology to Digitize Gold Ownership. Retrieved fromwww.businesswire.com/news/home/20170315005332/en/Orebits-Symbiont-Deploy-Distributed-Ledger-Technology-Digitize

CIM. (n.d.). CIM. Retrieved from Canadian Institute of Mining,Metallurgy and Petroleum: cim.org/CIM Definitions. (2014, May 10). CIMDefinition Standards for Mineral Resources and Mineral Reserves.

Retrieved from CIM:www.cim.org/˜/media/Files/PDF/Subsites/CIM_DEFINITION_STANDARDS_20142

NI 43-101. (2011, Jun. 24). NI 43-101 Standards. Retrieved from CanadianInstitute of Mining, Metallurgy and Petroleum:web.cim.org/standards/documentsBlock484_Doc111.pdf

EXAMPLE 3

Sovereign Financing

Financing a sovereign's deficit has become prominence for economicgrowth and stability, with the financial challenge, a sovereign isalways in-need for a cash infusion. Recently, sovereignty auspices arenot enough to get finance at a prime rate. When a government is lookingto add liquidity to the economy on a non-inflationary basis, it needs tolook to foreign investment and trade to accomplish this.

Many governments have proven mineral reserves but to due to manyreasons, these assets are not being utilized in any fashion. There is nomechanism to get the proven value of mineral reserves onto the centralbank ledger to issue currency against these mineral reserves (e.g.,gold) on a non-inflationary basis. The present technology permits asovereign to finance and issue a debt obligation against a new assetclass, such as a proven mineral reserve, which can be allocated in a wayto provide leverage and a line of credit, without requiring extractionof the mineral, thus permitting preservation of the resource, withextraction only required in event of default.

Utilizing the Sovereign Government Proven Gold Mineral Reserve.

The sovereign government, in this case, assigns the proven reserves toan international mining corporation as part of a public-privatepartnership. This is a common practice where mining rights and thereserve ownership is given out under different systems depending on thecompany and record keeping of the reserves through the governmentdepartment assigned these duties but generically they are referred to asmining claims.

To mitigate the political risk and logistical risk of adding any newterritory, the new government also provides a government guarantee asfor the value of the proven reserves and to further guarantee they willallow the mine to operate and export the product without hindrance. Thegoal is to bring the risk in-line with the existing ledger assets so allrespective securities stay fungible.

The international mining corporation then takes this claim ownership andthe sovereign guarantee information to a monetization entity, which“digitizes” the in-ground value through a smart contract.

The international mining corporation then has the fungible digitalassets they can be put into a trust and securitized within internationalfinancial markets with an audited value.

The international mining corporation can now pledge the digital assetsin trust to a commercial bank (e.g., in the originating country).Utilizing normal bank protocols, the new asset can be pledged to thecommercial bank, and the commercial bank can apply to the central bankfor approval of the new crypto asset as well a pricing. The central bankcan now create funds on a non-inflationary basis in the local economyincluding the finance activity to get the new mine into production. Thisscheme is represented in FIG. 6.

Although the disclosure is described above in terms of various exampleembodiments and implementations, it should be understood that thevarious features, aspects and functionality described in one or more ofthe individual embodiments are not limited in their applicability to theparticular embodiment with which they are described, but instead can beapplied, alone or in various combinations, to one or more of the otherembodiments of the disclosure, whether or not such embodiments aredescribed and whether or not such features are presented as being a partof a described embodiment. Thus, the breadth and scope of the presentdisclosure should not be limited by any of the above-described exampleembodiments, and it will be understood by those skilled in the art thatvarious changes and modifications to the previous descriptions may bemade within the scope of the claims.

What is claimed is:
 1. A token, representing an interest in a smartcontract, the smart contract representing an agreement, secured by asecurity interest in real property or a right in real property, toreturn the token within a predetermined period.
 2. The token accordingto claim 1, wherein the smart contract is implemented in conjunctionwith a distribute ledger.
 3. The token according to claim 1, wherein thepredetermined period is tolled if a substitute asset is tendered.
 4. Thetoken according to claim 3, wherein the real property or a right in realproperty comprises a mine having proven available reserves of thesubstitute asset.
 5. The token according to claim 4, wherein thesubstitute asset is gold.
 6. The token according to claim 4, wherein theproven available reserves are a predetermined multiple of the substituteasset.
 7. The token according to claim 1, wherein the token represents afractional interest in the real property or a right in real property. 8.The token according to claim 1, wherein the token is generated as atransaction of a cryptographically-authenticated, distributed ledgercomprising a database held and updated independently by each of aplurality of distributed elements, forming a consensus determination oftransaction validity.
 9. The token according to claim 1, wherein theagreement, secured by the security interest in real property or a rightin real property, is terminated if the token is returned within thepredetermined period, else the security interest in the real property ora right in real property is exercised.
 10. A method of defining a token,comprising: defining a smart contract, representing an agreement,secured by a security interest in real property or a right in realproperty, to return the token within a predetermined period; pledgingthe real property or a right in real property as the security interestto secure the smart contract; and issuing the token.
 11. The methodaccording to claim 10, further comprising returning the token, andreleasing the real property or a right in real property from thesecurity interest.
 12. The method according to claim 10, wherein thesmart contract is implemented in conjunction with a distribute ledger.13. The method according to claim 10, wherein: the token comprises afractional interest in the real property or a right in real property,the predetermined period is tolled if a substitute asset is tendered,the real property or a right in real property comprises a mine havingproven available reserves of the substitute asset, and wherein theproven available reserves are a predetermined multiple of the substituteasset.
 14. The method according to claim 14, wherein the substituteasset is gold.
 15. The method according to claim 10, wherein the tokenis generated as a transaction of a cryptographically-authenticated,distributed ledger comprising a database held and updated independentlyby each of a plurality of distributed elements, forming a consensusdetermination of transaction validity.
 16. The method according to claim10, further comprising exercising the security interest in the realproperty or a right in real property after the predetermined period ifthe token is not returned.
 17. A method for creating a liquid tokenrepresentation from an illiquid asset comprising: receiving a pledge ofan illiquid asset; and digitizing the illiquid asset into fractionalrepresentations using a smart contract on a distributed ledger network,the fractional representations being secured by the pledge of theilliquid asset as collateral.
 18. The method according to claim 17,further comprising trading a fractional representation on an exchange,recorded in a distributed ledger network.
 19. The method according toclaim 17, wherein the smart contract comprises an illiquid assetdescription, an illiquid asset owner, a quantity, and at least oneredemption rule.
 20. The method according to claim 19, wherein the atleast one redemption rule comprises a maturity date which triggers arelease of the pledged illiquid asset as collateral back to the illiquidasset owner in exchange for return of all of the original fractionalrepresentations.